Harvard dips into Friendly's

AP File PhotoCurtis Blake, 84, and his brother S. Prestley Blake, 86, who together founded Friendly Ice Cream Corp. with $547 in 1934, are shown outside the Friendly company conference center in West Springfield, Mass., in 2001.

BOSTON - Professors at the famed Harvard Business School will use the saga of Friendly Ice Cream Corp. as a case study in corporate governance.

The story starts with Friendly's co-founder S. Prestley Blake's nearly eight-year successful legal fight to wrest control of the company he calls "my baby" away from former Friendly's CEO Donald N. Smith.

The 29-page case study also covers San Antonio-based investor Sardar Biglari's purchase of Friendly's stock and demands for two seats on the board and the company's sale in August 2007 to Sun Capital Partners, a privately held Florida firm.

"All that in a setting of a company that is nice to talk about because it's ice cream," said Fabrizio Ferri, Harvard Business School assistant professor of accounting and management. "It lends itself to a very interesting discussion."

The school, which marks its centennial this year, pioneered its "case method" of study in the 1920s, bringing what it describes as "slices of business reality into the classroom in order to breathe life and instill greater meaning into the lessons of management education." More than 80 percent of the school's classes are built on this method of study, according to the school.

Ferri, along with Harvard Business School Professor V. G. Narayanan and researcher James Weber, spent four months meeting with Blake and Biglari and researching the case using publicly available documents before publishing the case in April. Teachers started using it in second-year master's of business administration degree courses this month . Harvard is selling copies for $6.95 each.

Ferri said he'll also use the case in classes he teaches to members of corporate boards of directors.

"They may be more sympathetic to the way the board dealt with the situation," he said.

S. Prestley Blake, now 93, said he's happy the case is getting more attention. He believes more people in the business world need to know the dangers of "poison pills," provisions in corporate structure that make it difficult to buy enough shares to take over a company. Blake said the pills are not there to protect shareholders or longtime employees, only executives.

"I succeeded in getting rid of Smith," Blake said. "It took me seven and a half years. It's a darn good thing I stuck with it as long as I did. No one else would have done it."

Smith and the people who ran Friendly's at the time said Blake's lawsuit was expensive to defend and diverted management's attention from running the company, according to the Harvard study.

Blake and his brother Curtis L. Blake, founded Friendly in Springfield in 1935. They sold the company to Hershey Foods in 1979 for $164 million. Hershey sold it to Smith's company in 1988 for $375 million and in 1997 Smith took the company public.

"(Prestley) Blake is kind of a symbol of American capitalism in the '30s, '40s," Ferri said. "Coming out of the Depression they were very risk-averse. They didn't believe in a lot of debt."

He contrasts that mind-set with Smith.

"Then you have a CEO who is a symbol of the CEOs of the '80s and '90s," Ferri said. "The way you build wealth is by leveraging into debt. Then," - in Biglari - " you have this avant garde of the hedge-fund activist," Ferri said.

But Prestley Blake didn't like the debt Friendly's had and Smith's strategy of closing and selling restaurants in order to pay down that debt. Blake also didn't like the relationship between Friendly's and Perkins, another restaurant company Smith controlled, and Smith's use of a corporate jet.

The stock dipped as low as $2 a share before Biglari started buying it with an eye toward rejuvenating the firm under new management.

"Essentially the goal is to clean up the balance seat," he said.

The fight continued until August 2007 when Sun Capital Partners, a privately held firm that doesn't have publicly traded stock, bought the company for $337.2 million.

Sun paid $15.50 a share, 30 percent more than what Friendly's stock was trading for at the time, ensuring a profit for all the stockholders including Prestley Blake and Smith.

"In the end, everyone was happy," Ferri said. Converting public companies into privately held firms that have less pressure to show short-term results is a trend in corporate America, Ferri said.

"I can ask students 'Why take a company private?,'" he said.

George R. Weldon is vice president of marketing at Friendly now. He came on board just as the sale was completed last year.

"We've seen the case study," Weldon said. "We really didn't see it as any new news. We're glad it's behind us, and we're terribly excited about the new ownership."

Curtis Blake read the Harvard case study after Prestley sent him a copy through Prestley's son. The two men, partners in business for more than 50 years, are no longer friendly with each other.

"I wasn't sure what the moral of the story is," Curtis Blake said. "The only moral that I could draw was that it pays to be an activist investor and raise hell."

Ferri met with Biglari and with Prestley Blake, but didn't interview Curtis Blake. Curtis Blake, 91, is mentioned briefly in the report during an outline of the company's history.

Curtis Blake said his brother had a personal vendetta against Smith while Curtis Blake credits Smith with rescuing the company from poor management at Hershey and giving it 19 more years of life.

"I thought Biglari was the guy who got the business sold," Curtis Blake said.

It was only when it looked like Prestley Blake and Biglari were going to work together and take control of the company that Smith found a buyer in Sun Capital. It turned out to be an excellent buyer at the 30 percent premium, Curtis Blake said.

"Its wonderful," Blake said "That's why I was so happy to hear it."

Curtis Blake said his brother is playing up his role, though. Prestley Blake did a wonderful job managing Friendly's in the early years, Curtis Blake said. "I've always given him credit for that," he said. "I never could have done it alone. Then as the company grew, he just couldn't think big enough."